Foolish Collective
Where's The Bargain?

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By wax
October 12, 2004

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It was one of those things I didn't realize I had noticed until after I had passed it by. And then for some reason my "Hey!, Wait a minute!" bell went off and made me stop. What did I just see?

I'm sure you've had an experience like that. Usually it happens to me when I'm reading a business report, or an on-line article. I'm reading away when all of a sudden I realize I just read something that was out of place. So I back up and re-read, usually several times, what I've just read.

I used to have to do that quite a bit when I was in school, back up and read things again. Of course that was usually because I was daydreaming while I was reading and ended up on page 52, only to finally realize I had no idea what the prior 51 pages had discussed.

The other odd thing that happens to me from time to time is when I'm driving. I'm zooming through traffic in an apparent hurry to be somewhere at no particular time, when all of a sudden I'm aware that I've driven 10 blocks and not seen a thing, not a stop light, not a traffic cop, not a pedestrian, nothing. All I know is that I'm where I am when reality once again finds me.

I'm pretty sure there's a medical name for such a phenomenon, but the internet didn't seem very helpful when I tried to find out what it was. Then again the search engines on the internet aren't really set up for idiots to ask questions like what is sleep driving, or what is daydream reading.

I read an article yesterday about searching for stocks using some specific information. I've "screened" for stocks in the past and so was a little bit disappointed when the article turned out to be more of the same, just more back patting by the author about how wonderful he was because he could spot a bargain from a stock screen.

When I "screen" for stocks I screen for stocks with a trailing annual free cash flow of $1.50 or more. Because I've used this particular screening criteria for so long, I already know what all of the stocks will be when the results are returned. Actually when I screen for stocks using my $1.50 or more in trailing annual free cash flow, there aren't any stocks returned, not a one. Maybe it's just me.

Anyway, so I had read this article and moved on to another website when that little "Hey! Wait a minute!" bell inside my head started making noise. What had I just read? What had I just missed was a better question? So back I went, grudgingly I might add, to read what I had just read.

The instant I saw the name of the article I knew what had set off my "Hey! Wait a minute!" bell. The article was about screening for Blue Chip bargains, with a bargain being defined as a Blue Chip stock currently trading at or near its 52 week low. The resulting group of "bargain" stocks was then compared against some additional criteria that had to do with the S&P 500.

When money managers, analysts, stock houses, newsletter sellers, or pizza delivery guys compare their investment returns against the S&P 500, it automatically sets off alarms in my head. I'm not going to get into the reasons it does because I've discussed them before, but let's just say that if the return percentages claimed by those money managers, analysts, stock houses, newsletter sellers, or pizza delivery guys haven't been audited by a major accounting firm, then as far as I'm concerned the percentages claimed are just sales fodder.

The other thing that piqued my curiosity was the screen itself. Why was a stock a bargain because it was trading at or near it's 52 week low? Was it because it was a Blue Chip? How dumb. Why would anyone want to buy a stock because it was a Blue Chip stock trading at or near its 52 week low? Why not buy some wet potato chips and stale beer and call it a day? In the end, it would probably cost a lot less.

Looking back at the article, there were 10 stocks listed, and I guess all of them were Blue Chip stocks so no issue there, but because I learned the hard way that price determines return, a bargain to me means buying a great company at a great price. And while the stocks in the article may have been Blue Chippers, I failed to see the bargains. But again, maybe it's just me.

Is Pfizer, Inc. (PFE) really a bargain at $30.00? How about The Coca-Cola Company (KO)? Is it a bargain at $40? Maybe Anheuser-Busch Companies, Inc. (BUD) is a bargain at $50, and is Sysco Corporation truly a bargain at $29.00? I had no idea, but the author of the article certainly seemed to think so.

According to the information I looked up on-line, the 52 week high for Pfizer, Inc. (PFE) is $38.88 and the 52 week low is $27.89, so a $30.00 price doesn't seem like a bargain to me. I also found that the 52 week high for The Coca-Cola Company (KO) was $53.50 and the 52 week low was $37, so $40 doesn't seem like any bargain to me either. The 52 week high for Anheuser-Busch Companies, Inc. (BUD) was $54.73 and the 52 week low was $48.50, so at $50.50 I again missed the bargain. The results for Sysco Corporation (SYY) were similar. A 52 week high of $41.27 and a 52 week low of $29.47. The article had the bargain price at $29.00. It was at this point, I simply gave up on the remaining six stocks, figuring it was probably just me.

But of the stocks I mentioned, everyone is missing something, something an investor must have in order to determine if there really are any bargains in the bunch. The missing element is value. What are the stocks mentioned actually worth? Just because a stock is trading at or near its 52 week low doesn't make it a bargain, Blue Chip or not!

Consider the articles you've read about investing where specific companies are mentioned. How many of them provide you with what the author thought was a reasonable value for the mentioned companies? Very few I would guess, which of course begs the question, what is a reasonable value?

A reasonable value, at least to me, is nothing more than a starting point for further evaluation. When I've finished evaluating a company, my reasonable value for the stock may be higher or lower. But to imply that a stock is a bargain because it's trading at or near its 52 week low is just plain silly, and investors that believe things like that, will probably watch their investment nest egg grow ever smaller.

So what about the companies I mentioned, what do I think a reasonable value is for them? For Pfizer, Inc. (PFE), I think a reasonable value is $38, for The Coca-Cola Company (KO) I think a reasonable value is $40, for Anheuser-Busch Companies, Inc. (BUD) I think a reasonable value is $55, and for Sysco Corporation (SYY) I think a reasonable value is $27.

With that information, if I look at what were supposed to be "bargains" and compare the 52 week lows to my reasonable value estimates, why Elizabeth, I don't find any bargains at all!

In the end I believe it's the investor that can hear that little "Hey! Wait a minute!" bell that will be consistently successful, not just because they have the ability to hear though nothing is being said, but because they have the ability to see, though nothing is really there.


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